Coca Cola Misses Earnings Target. Blames Weather.

"The weather is never important until its important. And then it's too late." -Anon

Businesses are regularly accused by Wall Street analysts and snarky business reporters of blaming weather for missed earnings targets. It's an often used and regularly maligned "excuse" that almost never fails to result in the affected company being punished by investors.

That was the case this week when Coca Cola released disappointing Q2 earnings and confessed that they were at least partially victimized by the weather.

"Our second quarter volume performance came in below our expectations ... we were faced with unusually widespread wet and cold weather conditions across the multiple regions, including North America and across Northern Europe and India all of which impacted the entire industry."

When assessing the impact of weather on a company's future performance, the question for investors is this: is the weather an unmanageable yet valid reason for short term earnings suprises, or, is it a not-so-veiled attempt to mask underlying issues? Or both?

In the case of Coca Cola and, for that matter, all publicly traded CPG and retail companies with weather exposure, the answer is a resounding ...yes.

The Weather Effect on Beverage Sales

The weather certainly can be (and often is) used as an excuse, but the reality is that weather is more than an excuse when it comes to beverage consumption and purchase.

In fact, the weather has a material impact on consumer demand in the category and is a legitimate reason for sales and profit volatility.

On the demand side, we know from work we've done within The Weather Company that the weather impact on beverage sales and consumption peaks during the spring quarter.

At an aggregate level, over 40% of the variation in sales of non-carbonated beverages can be explained by the weather.

For carbonated beverages the impact is not as pronounced but still meaningful, with about 15% of sales variation explained by weather.

The reason for the correlation isn't rocket science:

- hot weather in the spring generates increased demand for hydration, hence the very strong relationship with temperature.

1. Last year was phenomenal. The warmest spring in the US in 118 years and one of the driest on record resulted in absolutely perfect conditions for selling both carbonated and non-carbonated beverages.

2012 Regional Temperature Rankings. Source, NOAA

2012 Regional Temperature Rankings. Source, NOAA

The effect for Coca Cola's business was as you would expect given the weather relationship. They had a boffo quarter.

Here's how Coca Cola characterized last year's results:

"Our business realized solid top line results this past quarter, growing worldwide volume by 4% in the quarter and 5% year-to-date."

Prior year results are material to this year's results as all companies are expected to grow sales and margins every year. The fact last year's weather provided a boost to sales doesn't change that fact.

2. This year was brutal. It was one of the coldest springs in recent memory. Combined with late snow and heavy rain, this created an environment that was nearly as opposite as it could get for beverage demand and sales. It was no surprise that Coca Cola struggled to achieve their earnings target.

This also showed up in proprietary polling that we are conducting on weather.com -- beverage demand was down about 2% from last year during the key May/June time frame.

The combination of much colder temperatures and record rainfall (and late snow) in North America and western Europe all combined to take a major bite out of demand for cold beverages.

2013 Regional Temperature Rankings. Source, NOAA

2013 Regional Precipitation Rankings. Source, NOAA

A Silver lining?

Looking foward, relatively seasonal temperatures for the balance of summer plus a lower impact of weather on sales overall for the category means the worst of weather headwinds are behind the large beverage manufacturers.

On the bright side, the challenging quarter this year means the hurdle for next year's business will be lower -- maybe not a lay-up but certainly not as tough as this year's daunting comparison.

NOAA August 2013 Temperature Outlook

For additional perspective, following are links to my coverage of the topic on CNBC and Yahoo Finance:

I think people are genuinely more thirsty for plain unsugared beverages. I know that in Texas, I drink a lot more water than I used to drink, and try to drink tap water, mostly. I haven't had a coke in over a year, probably....it's hot here, and soda is too toxic in the amounts you'd need to hydrate.

This is an extremely important topic : the secondary impacts of climate change. It doesn't get sufficient play because everyone is so hyperfocused on climate-related weather disasters. The evidence is right here on Wunderground: Jeff Masters' posts about storms immediately rack up hundreds of comments, while this post as of today just had 15. In states like Maine (Vacationland) where the economy depends on good summer weather, a bad stretch in summer causes more than just Coke sales to plummet! But there are much farther-reaching reaching secondary effects. Examples: frighteningly rapid global spread of fungal pathogens, which love warmer, more humid conditions and whose spores can be carried thousands of miles, often being picked up by a weather system in one part of the world and carried aloft to another region. Ex: Organisms from western Africa have been identified in the coastal areas of New England. Fungal pathogens are now the number one threat to the four major food crops of the world: Rice, wheat, maize (corn), and (believe it or not) bananas. Fungi also cause white nose disease in bats and have devastated amphibian populations. Other secondary climate impacts that are ultimately more expensive than a single storm: crumbling infrastructure (frost heave and heat buckling of roads and foundations, karst cavern collapse ["sink holes"], huge shifts in water supplies and water quality, coastal erosion, and on and on. Thanks for highlighting this crucial topic in such a clever way.

Quoting 1. Skyepony:I'm close with a biochemist for CocaCola..or more specifically MinuteMaid a subsidiary of CocaCola.. They've known this was coming. You missed the whole point about how bad a year this was for the fruit production that goes into these juices. China, which they have put so much into the last few years had a horrible grow year. Somewhere else too, maybe Spain? Plus the crop delay from the cold spring in the US left them scrambling & paying higher for juice from elsewhere. The employees there are in full scramble mode, doing more with less..

I'm close with a biochemist for CocaCola..or more specifically MinuteMaid a subsidiary of CocaCola.. They've known this was coming. You missed the whole point about how bad a year this was for the fruit production that goes into these juices. China, which they have put so much into the last few years had a horrible grow year. Somewhere else too, maybe Spain? Plus the crop delay from the cold spring in the US left them scrambling & paying higher for juice from elsewhere. The employees there are in full scramble mode, doing more with less..